FTC Settlement with Sunday Riley Over Bogus Reviews Illustrates Agency Recognition of Litigation Risk Under FTC Act
As blogged about here and here, brands and intermediary agencies that they do business with are expected to train and monitor endorsers, utilize written social media policies, take appropriate remedial action and document all efforts to implement preventative advertising compliance measures, including those designed to ensure the clear and conspicuous disclosure of material connections between advertisers and endorsers.
On November 6, 2020, the Federal Trade Commission announced that, following a public comment period, the agency approved a final consent agreement settling charges that Sunday Riley Modern Skincare, LLC and its CEO misled consumers by posting fake reviews of the company’s products online, at the CEO’s direction, and by failing to disclose that the reviewers were company employees.
Sunday Riley Skincare sells a range of cosmetic products at various retailers, including Sephora, a multinational chain of personal care and beauty stores, and on the Sephora.com website. Sephora allows consumers to leave customer reviews of products sold on its website, providing a forum for sharing authentic feedback about the products it sells.
According to the FTC’s October 2019 complaint, between November 2015 and August 2017, Sunday Riley Skincare managers posted reviews of their branded products on the Sephora site using fake accounts created to hide their identities, and requested that other Sunday Riley Skincare employees do the same thing.
The FTC alleged that after Sephora removed fake reviews written by Sunday Riley Skincare employees, the company obtained an Express VPN account in an attempt to hide its online activity.
The final order settling the FTC’s charges prohibits Sunday Riley Skincare and Ms. Riley from misrepresenting the status of any endorser or person reviewing a product they are selling. This includes misrepresentations that the endorser or reviewer is an independent or ordinary user of the product.
The order also requires that they clearly and conspicuously disclose any unexpected material connection between endorsers and Sunday Riley Skincare, Ms. Riley, or any entity affiliated with the product.
The Commission vote approving the final consent order and letters to public commenters was 3-2, with Commissioners Rebecca Kelly Slaughter and Rohit Chopra voting no.
The Majority Statement of Chairman Joseph J. Simons and Commissioners Noah Joshua Phillips and Christine S. Wilson Regarding Final Approval of the Sunday Riley Settlement notes that this case is one of several recent FTC enforcement actions challenging fake or deceptive online reviews or endorsements for products and services.
These and similar cases seek to ensure that false and deceptive information is removed from the marketplace, enabling consumers to make informed purchasing decisions based on truthful and accurate information. In this case, the Commission’s complaint alleges that Ms. Riley and her company polluted the online marketplace by writing and publishing fake positive reviews for Sunday Riley Modern Skincare products – conduct that would amount to clear violations of the FTC Act. The Commission’s order holds Ms. Riley personally liable, prohibits both Ms. Riley and Sunday Riley Modern Skincare from making future misrepresentations (including through fake reviews), and requires them to instruct employees and agents about their legal responsibilities. Each violation of the order could result in a civil penalty of up to $42,530. There is no reason to believe that the Commission’s order will not protect consumers from further misconduct or that the potential for civil penalties will not deter future violations. Every case presents unique circumstances, and there are many factors that must be considered in determining what constitutes an appropriate settlement. The primary factor is the law. For example, to obtain monetary relief, the Commission must have a viable legal basis to demonstrate consumer injury or ill-gotten gains from the alleged violations. In some cases, such as frauds where the consumer receives no value, this calculation may be obvious. In others, including Sunday Riley, a legally defensible calculation of ill-gotten gains may be difficult. In such cases, the expenditure of resources needed to develop an adequate evidentiary basis reasonably to approximate ill-gotten gains may substantially outweigh any benefits to consumers and the market. We believe the Commission’s order strikes the right balance. The relief obtained in this case is consequential and will provide both specific and general deterrence. The administrative order binds Sunday Riley and its CEO. It constrains their future behavior by imposing limitations on their conduct, with the threat of civil penalties for violations. When evaluating relief we also must consider the cost and effect of the other sanctions imposed in the context of an enforcement action, such as the costs and constraints of complying with the injunction; the fencing in of otherwise legal conduct; the reputational effect of the order; the threat of follow-on actions by shareholders, private plaintiffs and other regulators; and other collateral consequences, such as the effect on relationships with business partners, vendors, investors, and regulators. All of these non-monetary sanctions can have substantial deterrent effect on violative behavior. Our dissenting colleagues focus on the lack of monetary relief, dismissing the efficacy both of injunctive relief and the naming of the CEO in this matter. This latter position is particularly curious given that, in other matters, they touted naming CEOs as the sine qua non for accountability. This action sends a clear message to other companies that the FTC will not tolerate fake reviews, and underscores the applicable legal standards to follow to avoid running afoul of the law. Fake and manipulated user reviews contaminate the online marketplace and inhibit informed decision-making by consumers. The FTC is intent on addressing this distortion of the marketplace, and is currently examining, among other things, how fake reviews affect consumer purchasing behavior; what platforms and other relevant market players are doing – and what they could be doing better – to combat fake reviews; and additional actions the FTC can take to address this problem beyond important law enforcement actions like this one. Advertisers and retailers should not doubt our resolve. Fake reviews, ratings, and rankings that pollute the digital marketplace are a high priority for the FTC, and we will continue to be active in this area. We also are mindful that true deterrence is not achieved via any single order but through concerted law enforcement campaigns. While this case standing alone will not cure advertisers of the urge to post fake reviews, it is part of a broader campaign to ensure that consumers are able to make purchasing decisions based on truthful and accurate information.
Conversely, the Statement of Commissioner Rohit Chopra Joined by Commissioner Rebecca Kelly Slaughter Regarding Final Approval of the Sunday Riley Settlement dissents:
The FTC is doubling down on its no-money, no-fault settlement with Sunday Riley, who was charged with egregious fake review fraud. This weak settlement is a serious setback for the Commission’s credibility as a watchdog over digital markets. To defend this settlement, the Commissioners supporting this outcome claim they had no basis to seek more than $0. Their analytical approach favors the fraudster, and it will undermine our mission in future cases. The Commission can end its no-consequences settlement policy by publishing a Policy Statement on Equitable Monetary Remedies, restating legal precedent into formal rules, and designating specific misconduct as penalty offenses through an unused FTC Act authority.
The dissent further notes that:
With millions of retailers closed during the pandemic, Americans are relying more than ever on online reviews to compare products. Fake reviews are polluting digital marketplaces, harming consumers and honest sellers. Fake review fraud is illegal, and the FTC has a responsibility to combat it. In the fake review fraud case before us today, Chairman Simons, Commissioner Phillips, and Commissioner Wilson have voted to finalize a settlement with a popular cosmetics company, Sunday Riley. The settlement includes no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing. Instead, Sunday Riley is merely being ordered to not break the law again … Despite almost unanimous opposition to the proposed settlement, Chairman Simons, Commissioner Phillips, and Commissioner Wilson are voting to finalize it without changes. Rather than taking action today, they kick the can down the road and suggest the Commission will one day take this problem more seriously. But it is not every day that whistleblowers come forward to reveal massive fake review fraud. This case was an opportunity for the Commission to signal that disinformation campaigns have costs. Instead, they’re sending a clear signal that the cost is $0. The Commission’s insistence on seeking only a number that was 100 percent accurate led us to seek a number that was 100 percent inaccurate. This was not our only option … empirical literature shows that positive reviews can materially and measurably increase sales. When a newly launched product attracts a slew of positive reviews, this can lead to a herd effect that generates massive revenue, because these reviews may affect how e-commerce platform algorithms prioritize listings. Given these effects, the Commission was in a strong position to estimate ill-gotten gains. But rather than relying on evidence and analysis, Chairman Simons, Commissioner Phillips, and Commissioner Wilson relied on a less rigorous approach that favors the fraudster. The Commission’s decision sends the unfortunate message to other fake review fraudsters that they, too, might be able to extract a no-consequences settlement from the FTC. In matters involving dishonest or fraudulent conduct, I do not support seeking nothing in settlement negotiations. To be credible as a digital regulator, we must change this approach. During the public comment period that followed the settlement proposal, consumers pleaded with the Commission to do more to hold the company and its CEO accountable. Commenters detailed their personal experiences relying on reviews to purchase Sunday Riley products. Many called the settlement a “slap on the wrist” and argued it would be a “green light” for further fake review fraud.
Commissioners Chopra and Slaughter’s comments regarding Chairman Simons, Commissioner Phillips, and Commissioner Wilson’s vote to finalize the proposed no-money, no-fault settlement without changes includes an unequivocal criticism that “[t]his approach does little to deter digital deception, and the Commission can and must do better.”
If imposing reputational costs is important to the majority, it is unclear why they did not require Sunday Riley to notify its customers of the fraud or forbid the company from manipulating search results to suppress information about this action. Relying solely on news reports to justify no-money settlements ignores the elaborate steps companies can take to “manage” their reputations, just as they “manage” consumer reviews … Chairman Simons, Commissioner Phillips, and Commissioner Wilson claim this settlement imposes certain hidden costs, but they seem to rely on speculation. They suggest the settlement may have a “reputational effect,” but they cite no data or analysis, and it is unclear why they assume that news reports would affect Sunday Riley’s sales, while the consumer reviews at issue in this case would not … they suggest Sunday Riley could face consequences from other regulators, but that should not justify a no-consequences settlement by this regulator … I am confident we could have developed a reasonable estimate of harm and ill-gotten gains, … rather than presuming fake reviews are harmless or applying a different legal standard because Sunday Riley’s conduct doesn’t resemble that of other FTC defendants … [T]he majority’s approach does not bode well for honest businesses looking to compete online.
Interestingly, the statement also expresses that “Sunday Riley’s alleged conduct likely violated the penalty statutes of many individual states. If the majority was genuinely concerned about the litigation risk under the FTC Act of seeking monetary relief, we could have simply enlisted states with their own penalty claims.”
“Given this spotty private policing, it is critical that, in the rare circumstances when law enforcement steps in, we send an unambiguous message that posting fake reviews is not worth the risk. Today’s no-money order, I fear, will have the opposite effect, sending the message that if you get caught and attract law enforcement scrutiny, the price you’ll pay is zero … The Commission should formally signal that it is terminating its no-money, no-fault settlement approach for dishonest or fraudulent conduct.”
The dissent calls for the FTC to:
Publish a policy statement on equitable monetary remedies that establishes a rebuttable presumption that the Commission will not pursue no-money settlements in cases involving dishonesty or fraud.
Restate existing legal precedent into rules and seek civil penalties against violators. For example, the FTC attorneys are currently undertaking a rulemaking to consider codifying its existing Made in USA guidance. “The Commission can codify basic tenets of the FTC Endorsement Guides – in particular, the requirement that endorsers disclose material connections to sellers – into a rule.”
Designate specific misconduct as penalty offenses. “The practice of endorsing products without disclosing material connections was condemned decades ago, and the Commission can act almost immediately to trigger substantial penalties against the worst violators.”
The dissent characterizes the Commission’s decision to finalize the settlement as “flawed” and a “missed opportunity” to protect consumers. Either way, the settlement clearly illustrates diverging policy within the FTC and at least a tactic recognition of growing litigation risk under the FTC Act.